Since 1980, weekly wages for U.S. workers have grown a paltry 7 percent according to inflation-adjusted data from the Bureau of Labor Statistics. While the economy and the world were changing dramatically (1980 was about the time the computer modem was invented and several years before the first cell phones even hit the market, for example), wages remained remarkably unchanged. For many, compensation has been stuck in the 1980s.
Wage stagnation is part of the larger issues of income inequality and wealth concentration. In fact, a briefing paper by Josh Bivens and Lawrence Mishel of the Economic Policy Institute states that “if the hourly pay of typical American workers had kept pace with productivity growth since the 1970s, then there would have been no rise in income inequality during that period.”
While there is little doubt that many types of workers have seen little real gain in their financial situation, available data do have some limitations. For example, wages are not the only aspect of compensation, and it is important to consider growth in benefits. In particular, medical insurance costs have risen substantially, increasing the value of employer-provided health insurance. In fact, benefits have grown 17 percent faster than wages in the past 25 years and now constitute almost 30 percent of total compensation. In addition, many types of workers don’t fit into common weekly wage data series, and some of these other categories have seen significant gains. As I have pointed out in previous columns, there is more than just income involved in building wealth.
Even with these caveats, though, the fact remains that wages have barely risen from 1980s levels for all too many Americans. At the core of much of the study and debate of the issue is the fact that while productivity and wages used to track together for the most part, the past few decades have seen an end to this trend, with productivity rising but leaving wages in the dust.
As the U.S. economy became more industrialized with the end of World War II, the higher corporate profits enabled by productivity gains were partly returned to workers in the form of higher wages. Beginning in the 1970s, however, returns shifted more toward the owners of capital (stockholders and those employees whose compensation is tied to stock prices). The result was an increase in inequality and, over time, wealth.
If corporations aren’t returning profits to workers in the form of wages, where is the money going? For one thing, corporations invest some of their profits in growing the business, as they should. This process has been going on for centuries, however, and is not the source of the problem. Companies have also used profits for stock buybacks and dividend payments. There are clearly times when it makes economic sense to buy back stock and pay returns to shareholders, but in some cases it appears to be driven by short-term goals such as supporting stock prices. In today’s highly scrutinized financial markets, any sign of weakness in stock price can lead to volatility, and companies (and their executives) have an interest in keeping prices up.
Corporations are in business to create goods and services, not engage in financial games. Over time, excessive focus on short-term stock market manipulations can not only use up too many resources, but can also detract attention from activities that will lead to long-term growth such as research and development and innovation.
Another reason for wage stagnation in some industries is the increasingly global nature of the economy. For manufacturing industries, it is challenging to compete on price with goods produced in countries with low wage rates. The need to hold down costs is a reality, and wages are a substantial component of costs. Automation can help increase productivity, with more output from the same workforce, and many firms find it more cost effective to invest in equipment and technologies rather than workers. Survival is at stake, and businesses have a fiduciary responsibility to shareholders.
The real question is how to fix the situation. It is unrealistic (and even undesirable) to expect companies to pay wages that jeopardize their ability to remain competitive in the long term. As an economic concept, a minimum wage is almost always a bad idea, contributing to slower hiring. From a social perspective, it can be justified to eliminate abuses stemming from substantial variations in bargaining power and to maintain a minimum return to workers. Legally forcing higher wages well beyond those supported by market conditions, however, is bound to backfire and hurt the very people it is intended to help.
Another aspect of the pattern that is crucial to long-term prosperity is recognition that it is appropriate and desirable to reward those who drive innovation. It is no bad thing that an inventor of a new technology, software application, or other good or service for which there is high demand receives financial rewards. We need that innovation, and encouraging it with dollars is beneficial to all.
There may well be tweaks to regulations regarding corporate stock purchases that could discourage firms from excessive buybacks designed to boost stock prices. There are also likely avenues to reduce uncertainty and costs of having employees (such as requirements related to the provision of medical insurance and the associated costs). Workers may be able to enhance earnings prospects in various ways. Over time, wages may be bid up as the U.S. workforce shifts with the aging of the baby boomers. This pattern was slowed by the Great Recession, but it appears to be resurfacing in recent data.
Giving corporations incentives to invest in employees is challenging, and forcing the issue could make the problem worse. From an individual perspective, financial prospects can be enhanced by identifying those jobs with better wage prospects and preparing for them through education and training. All in all, stagnant wages are a difficult issue, and it is crucial to tread carefully in trying to improve the situation.
M. Ray Perryman is president and CEO of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.